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Lessons on overcoming trade barriers

Peter Kuguru
Peter Kuguru, founder of Kuguru Foods, is a maverick. FILE PHOTO | NMG 

Peter Kuguru, founder of Kuguru Foods, is a maverick. He ventured into soda manufacturing without muscle to fight established global brands with deep pockets.

He has nevertheless made a mark and walked away with priceless knowledge in failure. He is a wise man. He knew when to walk away. In his famous song ‘‘The Gambler’’ Kenny Rogers advises: “You've got to know when to hold 'em, know when to fold 'em, know when to walk away, And know when to run.”

This portion of the song reveals that entrepreneurship is a gamble whose success depends on how much risk one takes. Sometimes you lose. What matters most, however, is the courage to start all over again.

Softa’s exit was forced by monopolies in the sector. Consumers will have less choice and this is how monopolies like to play.

Dominant players use a strategy known as “category captain system” whereby retailers favour bigger suppliers in product category and give them the responsibility to determine where their competitor products will be placed.

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In return, the retailer gets concession from monopolies to smother competitors. In this case startups like Softa have no chance of scaling up when the customer has no visibility of the product.

In the isles of soft drinks, several brands that are seemingly independent and supposedly competing with each other are actually products of the same company.

For example, if you had a problem with Brookside milk and instead you purchase the next brand like Tuzo, Fresha, Dairy Fresh milk, Brookside still wins. Same when you buy Sprite, Coke, 7Up, Krest, Minute Maid, or Fanta: Coca Cola wins.

Two global monopolies will literary take up all shelf space so that a brand like Softa becomes virtually invisible. This strategy is used by many food industry manufacturers to dominate the shelves and deny competitors any chance of visibility.

Another strategy to eliminate small players is called “monopsony power” where giant retailers use their monopoly power to force suppliers cut prices to the extent that some suppliers compromise on product quality to meet the objectives of the retailer.

In the recent past several small manufacturers have collapsed in the hands of giant retailers simply because these retailers fail to pay for supplies. Carrefour for example, demanded that suppliers pay a non-refundable fee of Sh1.4 million to do business with it. A demand that effectively discriminates small manufacturers in their own country.

Some large manufacturers, particularly in the alcohol industry, have been accused of buying competitor products and destroying them as a strategy to ensure that no one consumes a new brand.

In a free market economy like Kenya, it is only through regulation that these unethical practices can be eliminated to give consumers a wider range of choice and encourage innovation to get the best products locally. If such practices were to show up in banking sector, the regulator would immediately deal with that. Kuguru is therefore right in faulting the government for failure to protect not only small manufacturers but consumers too.

The government must step up surveillance to protect local manufacturers and help them succeed.

This is important because some foreign “investors” sometimes advance the narrative that Africans will never be good in manufacturing.

Unfortunately, there are many who have bought this narrative to the extent that locally produced goods are shunned in favour of foreign goods.

This perhaps explains why manufacturing contribution to GDP declined from a high of 12.7 percent in 2007 to a low of 8.4 percent in 2017.

From Vision 2030 to Big 4 Agenda, Kenya has always prioritised value addition and manufacturing as a strategy for employment and wealth creation but we have never delved into the dynamics of growing local Micro, Small and Medium Enterprises.

In most cases, foreign investors have had more concessions than local entrepreneurs. A deliberate policy could push medium enterprises into large manufacturing entities and likewise Micro to Small and Small to Medium.

We must learn from the failures of Kuguru and how Asian Tigers succeeded in building local manufacturing industry.

For a start, we need to provide local entrepreneurs with Business Development Services to help build capacity, especially in overcoming such barriers as highlighted in this article, build markets as well as boosting operational and strategic issues of local enterprises.

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